Savings accounts in the United States and the United Kingdom are similar in many ways: both are designed to help you save money and earn interest, and both are available in several forms. They differ, however, in terms of interest rates, how interest is earned, and tax rates. Here’s how savings accounts differ between the U.S. and U.K.
Basics of an American Savings Account
In the U.S., a savings account is designed to keep money secure while earning a small amount of interest each month. Savings accounts are offered by banks and credit unions, and they are insured through the Federal Deposit Insurance Corporation (FDIC) for up to $100,000. Interest on these savings accounts is typically compounded daily and paid each month.
While you can deposit as much as you want into a U.S. savings account, the federal government limits withdrawals. Regulation D limits you to just six transactions per month on certain withdrawals and transfers from a savings account. If this limit is exceeded, the bank can charge a fee, close the savings account, or convert it into a checking account. Withdrawals made at an ATM and in-person transactions are exempt.
There are two basic types of savings accounts: basic savings accounts and money market accounts. Basic savings accounts require a low or no minimum balance with very low interest rates. Money market accounts (MMAs) pay a better interest rate but typically come with a higher minimum deposit. With an MMA, you can also write up to 3 checks on the account per month.
Basics of an English Savings Account
A U.K. savings account allows you to put away money so it can grow and earn interest. Savings accounts are offered by banks, online savings companies, and building societies. There are several types of accounts available.
With a savings account, you will have a personal savings allowance that allows you to earn a specific amount of interest on the savings before you pay taxes:
- Basic rate: Earn £1,000 in interest before paying taxes at a rate of 20%
- Higher rate: Earn £500 in interest before paying taxes at a rate of 40%
- Additional rate: You will not qualify for a personal savings allowance and the tax rate is 45%
There are a few types of savings accounts that vary in how you deposit and withdraw money. A notice account requires you to give notice, such as 60 days, to withdraw money without paying an interest penalty but you can pay into the account whenever you want. A regular saver account requires that you save at least a set amount of money each month such as £25. Regular savings accounts usually offer the highest interest rates but they have strict terms to meet. If you miss a monthly payment into the account, your rate can drop significantly, potentially going from 8-10% to 1%. A fixed bond account locks the money away for a specific term such as one year in exchange for a fixed interest rate.
Individual Savings Accounts (ISAs)
There are some savings accounts in the U.K. that are completely tax-free. An ISA allows you to earn interest without income tax, but there is a limit to how much you can put into the account. You have an ISA allowance every tax year. For the current year, the ISA allowance is £20,000 and the tax year ends on the 5th of April of the following year. You have until the 5th of April to use up this allowance but you cannot carry forward any unused allowance. Depending on your tax rate, you can save 20% to 45% on income taxes.
There are two primary types of ISAs: cash ISAs and stocks and shares ISAs. There are a few specialist types as well.
A cash ISA can be instant access to withdraw and deposit funds whenever you want or a fixed term which means your money is tied up for a fixed period of time with a fixed interest rate. Fixed cash rate ISAs are popular because they offer the best interest rates although this is only a good option if you won’t need access to the money for the full term, which may be 1 to 5 years.
Cash ISAs work like certificates of deposit (CDs) in the United States. CDs through banks and credit unions offer higher interest rates than savings accounts but require leaving the deposit in the account for a specific term that may be as short as one month or as long as several years. CDs have a maturity date at which point the funds and interest can be withdrawn in full. If money is withdrawn early, there is an early withdrawal fee. Unlike a fixed cash ISA, however, CDs are not tax-free.
Stocks and shares ISAs are investment accounts. The money you deposit may grow much faster than with a savings account or cash ISA, but it’s also at risk. You will not pay tax on the return you earn from the ISA, but you will pay dividends tax on any dividends from your investments. Your annual ISA allowance applies to all ISAs, including cash and stocks and shares ISAs. If you contribute to a cash ISA, the amount must be deducted from your overall ISA allowance to determine how much you can invest in your stocks and shares ISA.
This type of ISA is most comparable to an Individual Retirement Account (IRA) in the U.S. An IRA is a retirement savings vehicle that allows you to contribute up to a certain amount each year. There are two main types of IRAs: a traditional IRA allows you to make tax-deductible contributions with withdrawals in retirement taxed at the regular income tax rate. A Roth IRA does not offer a tax break on contributions, but withdrawals and earnings are typically tax-free in retirement.
Savings accounts in the U.S. and the U.K. are similar on the surface as both allow you to earn interest on your savings. In the U.K., however, you can enjoy tax-free interest up to a limit and enjoy additional tax-free growth through an ISA. Interest on savings accounts in the United States is not tax-free and subject to income tax.
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